A-level Economics Key content part 7

XED values, applications, pros and cons and how theyd be represented on graphs

what does XED measure

the responsiveness of demand for one good to a change in price of another good

XED formula

% change in quantity demanded of good A ÷ % change in price of good B

what does a positive XED value mean

the goods are substitutes – as price of one rises, demand for the other rises

what does a negative XED value mean

the goods are complements – as price of one rises, demand for the other falls

what does an XED value of zero mean

the goods are unrelated – changes in price of one do not affect demand for the other

give an example of substitute goods

Coca-Cola and Pepsi – consumers switch when one’s price rises

give an example of complementary goods

printers and ink cartridges – when printer prices rise, demand for ink falls

what type of elasticity do substitute goods show

positive slope showing demand increases as the other good’s price increases

what type of elasticity do complementary goods

show

negative slope showing demand decreases as the other good’s price increases

why is XED important to businesses

it helps firms understand competition and relationships between products

how can XED help in pricing strategy

a firm can adjust prices knowing how strongly products are linked – strong substitutes risk losing demand if prices rise

what does a high positive XED indicate

close substitutes – small price changes in one good strongly affect the other’s demand

what does a low positive XED indicate

weak substitutes – consumers only slightly switch between products

what does a high negative XED indicate

strong complements – demand for one strongly depends on the other’s price

what does a low negative XED indicate

weak complements – price change in one slightly affects the other’s demand

if XED = +1.2, what type of goods are they

strong substitutes – positive and elastic relationship

if XED = -0.8, what type of goods are they

complementary goods with inelastic cross demand

if XED = 0, what type of relationship exists

no relationship – goods are independent

what type of elasticity do strong substitutes show

steep positive line where small price rise of one increases demand for the other

what type of elasticity do strong complements show

steep negative line where small price rise causes large fall in demand for the other

how do firms benefit from knowing XED for complements

they can bundle goods or set joint pricing (e.g. printers + ink) to maximise sales

how do firms benefit from knowing XED for substitutes

they can predict competitive responses and price more strategically

why is XED useful for supermarkets

to understand which brands compete or complement, influencing shelf placement and promotions

how does XED help in merger decisions

firms with high positive XED are close substitutes, so merging may raise competition concerns

what does it mean if XED is very high and positive

consumers switch easily between products – strong competition

what does it mean if XED is near zero

the products are not related – price of one doesn’t affect demand for the other

why might complementary goods have a weak negative XED

consumers can use substitutes for the complement (e.g. butter instead of jam with bread)

what type of elasticity do unrelated goods show

flat line showing no relationship between price of one and demand for the other

summarise the XED sign meanings

positive = substitutes; negative = complements; zero = unrelated goods

what type of elasticity do perfect substitutes show

straight upward line showing directly proportional positive XED